WHAT BUSINESS STRATEGIES WILL HONG KONG MANUFACTURERS PURSUE
WITH THEIR PRC INVESTMENTS IN THE 1990'S
by
HO SAU-SAN and LEUNG WING-KEE
《 巧 i %、 ^
RESEARCH REPORT
Presented to
The Graduate School
In partial Fulfillment
of the Requirements for the Degree of
MASTER OF BUSINESS ADMINISTRATION
THREE-YEAR MBA PROGRAM
THE CHINESE UNIVERSITY OF HONG KONG
MAY 1990
” C / ”
Prof. K.C.Mun
Advisor
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ABSTRACT
With the increasing dependence of Hong Kong on China as a
production base for its manufacturing industry, a large amount of Hong
Kong manufacturers' capital has been locked into the economy of China,
In addition to minimizing the economic risk of their investment in
China, Hong Kong manufacturers also have to calculate the political
risk they are facing vith a view of working out a set of business
strategies to pursue vith their PRC investments.
In this study, the views of local Hong Kong manufacturers in the
two most represented industries, namely garment and electronics,
towards extending their relationship with China are solicited and the
strategies to be adopted to avoid political risk associated with their
investments in Chins are ©xamined. Differences and comnionalities
between the tvo industries are identified. It is found that although
some strategies like relocation to other South East Asian countries in
general are possible, these options are only open to large firms who
have the financial capability of doing so. For the majority of small to
medium sized manufacturers, maintaining or even extending their
production in China remains the best possible option. The low
production cost and short payback period for setting up their
production base in China remains a major attraction to Hong Kong
manufacturers and the economic benefits brought about by relocating
into China still outweigh the political risk associated with this move.
11 i
TABLE OF CONTENTS
ABSTRACT ii
TABLE OF CONTENTS iii
LIST OF TABLES •
ACKNOWLEDGMENTS
Chapter
I INTRODUCTION �
II BACKGROUND 2
Economic and Political Relationship Between Hong Kong •and China 2
Political Unrest in China 3 Hong Kong Manufacturers ‘ Attitudes 3 Garment and Electronic Industry 4
III STRUCTURED AND UNSTRUCTURED INTERVIEWS 7
Unstructured Interviews with Investment Advisors, General Traders 7
Structured Interviews with Top Executives of the Glorious Sun Group g
Structured Interviews with Director of Gold Peak Industries (Holdings) Ltd. - Chairman of the Electronics Sector in the Federation of Industries 1987-1988 10
IV LITERATURE SURVEY 13
Definition of Political Risk 1 3 Measuring Political Risk 14
Classification of Political Risk 1 5 Managing Political Risk 17
V THEORETICAL FRAMEWORK 20
VI HYPOTHESIS 23
VII RESEARCH DESIGN DETAILS 26
Type and Nature of Study 26 Study Setting and Time Horizon 26 Unit of Analysis 26
VIII POPULATION AND SAMPLE 28
1 V
IX SAMPLING METHOD 30
X DATA COLLECTION METHOD 32
Method 32
Questionnaire Design 32 Procedures 34 Results of Pretest 34 Revision to the Method of Data Collection 35
XI INTERVIEW RESULTS 37
XII ANALYSIS OF RESULTS 40
Difference in Strategies Pursued between the Garment
and Electronics Industries 40 Difference between Short Term and Long Term
Strategies 44 Difference in Strategies between Small and Large
Manufacturers 45
XIII GENERAL ATTITUDES OF HONG KONG MANUFACTURERS TOWARDS POLITICAL RISK 43
One-country Tvo-systems Concept 48 "Open Door" Policy of China 48 Special Situation of China 48 Transfer Risk 50
XIV WHAT BUSINESS STRATEGIES HONG KONG MANUFACTURERS WILL PURSUE 51
Problems or Difficulties Faced by Hong Kong Electronics Manufacturers 51
Strategies to be. Pursued by Hong Kong Electronics Manufacturers 51
Problems or Difficulties Faced by Hong Kong Garment Manufacturers 53
Strategies to be pursued by Hong Kong Garment
Manufacturers 53
XV CONCLUSIONS 55
APPENDIX 60
BIBLIOGRAPHY 72
V
LIST OF TABLES
Table 1 Results of Telephone Interviews for the Garment
Industry 38
Table 2 Results of Telephone Interviews for the Electronics
Industry 39
Table 3 Difference in Strategies Pursued between the Garment and the Electronics Industries 41
v i
ACKNOWLEDGMENTS
We would like to take this opportunity to give our vote of thanks
to Mr. Simon H.P. Chov, Deputy General Manager of the Glorious Sun
Group, Mr. Paul C.W. Lo, Director of Gold Peak Industries (Holdings
Ltd. , Mr. K. L. Wong, Director of Fedility Mercantile Co. Ltd. and Mr.
Peter K.S. Ngan, Secretary General of The Federation of Hong Kong
Garment Manufacturers for devoting much of their precious time in
sharing with us their vision and their valuable experience towards
investing in China during the face-to-face interviews, to various other
manufacturers, investment advisors and general traders who have
enlightened us in giving us their opinions and views towards their own
company's future strategies, and to those top executives who have
kindly responded to our telephone interviews. Last but not least, we
vould like to thank Professor K.C. Mun for his guidance and advise on
our work.
S. S. Ho
W. K. Leung
1
CHAPTER I
INTRODUCTION
In the decade since China emerged from isolation, its burgeoning
trade with the West has further lifted Hong Kong's status as a
regional business and financial centre. Consequently, China has also
relied on Hong Kong as the most important doorstep to attract foreign
exchange investment and the associated entrepreneurship, management
skills, marketing netvork etc. which are vital elements for its
economic development and modernisation.
But since the eruption of China's political instability in early
June last year, economists advanced widely divergent views on how this
intertwined economic relationship would be affected. Will the
territory be able to regain its momentuni and secure an economically
rewarding relationship vith China throughout the 1990's?
More specifically, this research will try to examine the views of
local Hong Kong manufacturers in the garment and electronic industry
towards continuing their working relationship with China. Emphasis
vill be placed on the strategies that vill be adopted by these
manufacturers to reduce or avoid the political/economic risk of their
investment in China.
It is hoped that the results of our study will shed some light on
the economic role and stance of Hong Kong that will have a bearing on
China's economy in the coming decade.
'A
CHAPTER II
BACKGROUND
Economic and Political Relationship between
Hong Kong and China
China's interest in attracting foreign investment on a large scale
dates from the promulgation in late 1978 of its Four Modernizations
Programme and the associated "open-door" policy. For more than a
decade, due to its close cultural link and geographic proximity to
China, Hong Kong's investment have surged up to account for more than
one-third of the total foreign investment in China.
Meanvhile, especially in the recent few years, the territory's
economy has experienced spectacular high rate of growth. Despite its
favourable effect, this has also resulted in an acute shortage of
labour. Compounded vith the sharp rise in property prices, the
production cost in many industries have increased significantly, thus
impairing the competitiveness of Hong Kong's products in international
markets.
Consequently, many Hong Kong industrialists have transferred their
manufacturing facilities into China through outward-processing
arrangements involving sub-contracting, joint ventures and other
methods of collaboration. Recently, this trend of relocation of
industries into China is expanding rapidly and in addition to the
transfer of assembling and processing operations, some industrialists
3
have begun to move the whole production lines into China.
In fact, from a long term strategic point of view, it hae been
suggested by Mclean (1988) that it ie a right direction for Hong Kong
to gradually move out its manufacturing production to China to exploit
the comparative advantages of cheaper land and labour cost there. An
evolution process can then take place for Hong Kong to reposition
itself from a manufacturing centre towards a major regional trading and
financial centre.
Political Unrest in China
However, after the crack down of the political unrest in Beijing
that occurred in June 4, local investors were shaken. On one side,
manufacturers who have relocated most of their manufacturing base into
China have survived the turmoil largely unscathed. China's land and
labour have offered inexpensive alternatives and other intangible
advantages to local industries that are hardly comparable. Local
investors in general are also interested in the huge potential market
generated by the over 1.1 billion population. On the other side, waning
demand reported by importers and retailers all reinforce a profile of a
community that is sharply tightening its belt. As many economists and
businessmen see it, those incongruities underscore a paradox that seems
likely to bedevil Hong Kong economy throughout the 1990's. That paradox
is Hong Kong's economically rewarding yet politically perilous
relationship with China.
Hong Kong Manufacturers" Attitudes
Despite the crisis in China, most companies in Hong Kong with heavy
exposure in China expressed different views over continuing their
working relationship with China immediately after June 4. Some of them
4
may carry a more pragmatic 'wait and see' attitude. Those inveetmentB
which involve huge amount of money and focus on big infrastructura�
projects such as those invested by international companies and large
Hong Kong companies like Hopewell may express a more positive attitude.
But complex political reasons combined with economic ones may underlie
such undertaking.
It is generally accepted that the industrial sector form the
backbone of all economies. Comments of some of the well-known
industrialists such as Tomei Industrial (Holdings), Video Technology
Electronics, Cosmos Machinery, Lam Soon (HK) Group, etc. (SCMP Jun 7,
1989) could be summarized as follows:-
(1) Joint Ventures in southern China were reported working as
usual, however, with fear that unrest would spread to
Guangdong province, plans for expansion in China will be
frozen.
(2) Existing operations will continue but reconsider deals in
aspects such as withholding part of installment plan.
(3〉 Pushing to decrease dependence on China by stepping up
expansion of production bases in Thailand, Malaysia etc.,
places that are still enjoying Generalised System of
Preference Status in the U. S.
<4) Will be extremely cautious about entering new manufacturing
agreements with sub-contractors.
<5) Launch of pending investments would be delayed and spread out
over a longer period i.e. the crisis has made timing a
critical factor.
Garment and Electronic Industry
It is envisaged that there will be disparities in the views of
5
different investors in different industries on the risk reduction
strategies to be pursued. It will be interesting to study the different
strategies to be adopted by different industries. However, in order to
control the scope of our research due to limited resources and
manpower, we decided to investigate two of the most represented
industries at the top of the domestic export profile of Hong Kong,
which are garment and electronics.
Garment industry has been the most important export earnings
industry in Hong Kong for more than a decade and it still accounts for
31X of the total export as at end of 1988. The industry is also the
largest in terms of establishments vith more than ten thousand
factories, accounting for 20.8% of the total manufacturing
establishments. Garment manufacturers are among the earliest
industrialists in Hong Kong to relocate into China to take advantage of
the lov cost, abundant labour and export quota. Most factories have a
high percentage of production base in China. Before, this industry used
to be more of a labour-intensive and low technology type that suits the
production environment conditions in China.
Electronics industry is the fastest growing industry in the recent
decade to become the second largest manufacturing industry in Hong
Kong, accounting for about 257. of total domestic exports. According to
the statistics from Hong Kong Trade Development Council, the industry
is composed of small factories with 807. of them employing less than 50
workers. There are currently about 20 electronics manufacturers listed
in the Hong Kong Stock Exchange. Due to production cost savings and the
availability of labour, over 90% of the local electronics manufacturers
are now engaged in sorae forms of production arrangement in China.
Therefore, it is anticipated the views of garment and electronic
G
manufacturers towards the current political climate and the future
changes in the production environment could be very representative.
7
CHAPTER III
STRUCTURED AND UNSTRUCTURED INTERVIEWS
Our research team conducted a couple of structured and unstructured
interviews vith investment advisors, general traders, pioneers in
garment industry and experienced big names in electronic industry.
Unstructured interviews were mainly conducted with investment advisors t
and general traders to tap some of their ideas on the general economic
situation of the different facets of China business encountered
recently after 6 wonths have lapsed since the unrest in Beijing.
For the structured interviews, the research team deliberately
arrange meetings vith high rank officials in the industry who actively
participate in daily business strategy formulation. During the course
of the interviews, ve tried to surface their opinion and views towards
their ovn company's future strategy. PRC investment environment and
prospects as veil as the business strategy followed by their fellow
businessmen were also solicited. A brief summary of the results and
findings organized under 3 target interviewee groups are as follows:
Unstructured Interviews vith Investment Advisors,
General Traders
During the course of our interview, we addressed questions to China
investment advisors and traders concerning their views on the probable
change in general business strategies of Hong Kong manufacturers with
PRC investment in the aftermath of the political unrest in Beijing.
ft
They expressed more or less the same kind of views and share eome of
the opinions as follows:-
(1) Most of them agreed that probably over 807. of Hong Kong
manufacturers have relocated into mainland China, though to a
different degree. The main objective of relocation for Hong Kong
practitioners was to get abundant supply of labor at a much lower
cost.
<2) For the middle and small manufacturers, they actually have no
choice or alternatives but to relocate into mainland China for
survival. Therefore, it is almost impossible for them to pull
their investment out from China.
<3) Going down to the opeorational level, some of the new problems faced
and strategies followed by general manufacturers are:
a) Even if Hong Kong manufacturers plan to expand or step up
their China production base, they were not supported and were
hindered by the still cautious and conservative views of
bankers and financial institutions
b) Real divestment to countries like Thailand or Malaysia was
only possible for big factories who can afford the large
amount of initial capital outlay or set up expenses. Some of
the smaller factories have suggested that they might join
together to form a stronger negotiation power with the host
government. After then, each will develop their own business.
But this proposal was only at a very primitive stage.
c) The general payback period for Hong Kong manufacturers will
usually be less than 3 yrs. There is rare chance especially
for middle to small manufacturers to plan beyond 1997.
d) They noticed that there was a general attitude change for most
middle and small factories in making investment commitment
9
decisions. Before June 4, most of them are willing to risk a
higher percentage of their assets in return for a higher
reward. Now most of them will be more cautious,
e) For long term planning, another alternative to divestment is
to change the domicile of the holding company so as to make
their present investments in mainland China as well as in Hong
Kong, which is going to be returned to China soverignty, under
the title of foreign assets.
Structured Interview with Top Executives of the
Glorious Sun Group
The Glorious Sun Group first started in the 1970s as a small
garment manufacturer and has now expanded into a consolidation composed
of the whole line of business including textiles, manufacturing,
trading and other related industries. The organization chart of the
Company is shovn in Appendix 1. The annual turnover of the Company is
over HKD 000 Mn. It established its first production base in China in
the late 1970s and has thus established 7 different production bases in
areas like Hubei, Beijing, Jiangsu, Liaoning and Huizhou. They have
also set up different production bases in Indonesia, Singapore and the
Philippines.
Our interviewee commented that like most other large garment
factories, they have already set up some overseas production bases and
followed the strategy of vertical integration in their expansion, which
implies that they could be flexible enough to shift their production
when there is political instability in one of the locations. The other
thing is that since they are engaged in the dyeing, textiles, garment
manufacturing up to playing the role of trader, wholesaler and
retailer, they are not only able to reap all the profit margins but
10
they could have the control of the export market network and the import
of raw material, thus providing integrative impact on the host
government economy by creating backward and forward linkage. According
to the interviewee, after June 4, most manufacturers of the garment
industry actually do not see any change in their normal operation in
China and they vili continue with their production ae long as it is
economically justified.
Structured Interviev vith Director of Gold Peak Industries
(Holdino) Ltd. - Chairman of the Electronics Sector
in the Federation of Industries 1967-1988
Gold Peak Industries (Holdings) Ltd. is one of the largest
electronic products manufacturer publicly listed in the Hong Kong Stock
Exchange. The Company has been established for 26 yrs. Their products
included battery, car audio products, car amplifiers, parts and
components and electrical products together contributing to an annual
sales turnover of HKD843 Mn as at the end of March 1989. They have
established more than ten joint ventures in Huizhou, a city near
Shenzhen in the past 5 years. The distribution and principal functions
of the Company is shown in Appendix 2. They were among the most
successful industrialists vith the ability to achieve breakeven target
within six to nine months of establishment of the China ventures. The
total production from their China based ventures accounted for more
than 40% of their company total production.
When we addressed the same question of whether our interviewee
noticed any substantial difficulties or any change in business strategy
after the June 4 event in Beijing for the electronic industry in
general, his comment vas that most factories did not notice any new
problems arising with their investment except that local sales to China
11
vas quite severely affected. Thie is mainly due to the credit
tightening policy being adopted by China government recently. But
then, since the electronic industry is basically export oriented in
nature, most companies should be able to survive with their export
earnings. However, there might be pressure from foreign buyers who
were frightened by the political situation in China. Hence, larger
manufacturers especially OEM factories were forced to look around for
locations in other countries for suitable nev production bases. As a
matter of fact, some of these new bases were only established as a
selling point to comfort their foreign trading partners, thus implying
that for economic reasons, China still remains to be their most
important production base.
On the other hand, small factories will undoubtedly have to rely
very heavily on their production base in China. It is absolutely very
difficult and expensive for them to pull out, reasons being:
<1) Insufficient resources - the initial outlay cost to set up new
production base in other South-east Asian countries is very high.
It is out of reach of general small factories. Whereas after ten
years of development, the infrastructure of China is more
attractive with readily available factories elsewhere by having
installed basic facilities such as electricity, water supply,
communication network etc.
(2) Difficulty of management and control - due to the proximity of
China to Hong Kong, Hong Kong manufacturers could easily send
technicians as well as managerial supporting staff to look after
their production in China whereas it is expensive and time
consuming to fly to other Southeast Asian countries.
(3〉 Communication problems - most middle-aged skilled labor who are at
the supervisors grade normally are not English speakers. The can
12
simply use Cantonese, their mother language, especially in the
southern part of China to communicate with local workers. This
will facilitate the transfer of technological knowhow and enhance
staff morale. It is not unusual that Hongkong staff may
psychologically resist going to a foreign place where they are
unable even to speak the local language.
(4) Presence of staff union - there is virtually no staff union in
China. This is especially welcomed by small to middle factories.
When they have to rush a big order, they can contract a few hundred
to thousands of workers quite easily from China and then discharge
them when the order is finished. This kind of advantage enjoyed by
manufacturers in China is not easily comparable in other areas.
13
CHAPTER IV
LITERATURE SURVEY
Political risk has been investigated and researched for a number of
years and has thus become one of the fastest growing sectors in
international business studies. With each additional international
crisis, the demand for risk analysis proliferates.
Definition of Political Risk
Kobrin (1979) suggests that political risk implies "unwanted
consequences of political activity". Risk brought about by political
sources or environment has been defined as the chance, possibility, or
probability of loss (Baglini 1976, 1983), as the probability of the
future occurence of events or acts (Nehrt 1970; Overholt 1982; Poynter
1984), as the (host government) actions adverse to foreign investment
(Jones 1984), as potentially significant managerial contingencies
(Kobrin 1982), as changes in the operating conditions (Jodice 1984), as
probability that events, changes, and conditions will impact on
business operations and goals (Lax 1983; O'Leary and Coplin 1983).
Jodice (1984) says that political risk is distinguished from
economic risk and social risk, but that at some point the
distinctiveness of political risk disappears. Overholt (1982) denounced
the attempts to distinguish between political and economic risk and
empathizes the importance of political-economic integration. The
results of their study indicates the close relationship of the
21
consequences of political risk on economic aepecte of investors.
Although the consequences are usually adverse, changes in the p o l i t i c s�
environment can also provide sources of opportunity. Despite the
potentially severe consequences of political risks, Stephen Kobrin
(1979) conducted a survey of how firms view and react to this risk. He
found that managers considered political risk, typically quite loosely
defined, to be an important factor in the foreign investment decision.
Most risk analysis is superficial and subjective. The response is
frequently avoidance vith limited information or data available.
Buckley (1987) suggested that political risk took various forms,
ranging from changes in tax regulations to exchange controls; from
stipulations about local production to expropriations; and from
commercial discrimination against foreign-controlled business to
restrictions on access to local borrowings. He attempted also to define
political risk as the exposure to a change in value of an investment or
cash position because of government actions.
Measuring Political Risk
Despite the near-universal recognition among multinational
corporations, political scientists and economists of the existence of
political risk, there is no unanimity yet as to what constitutes that
risk and hov to measure it. A number of commercial and academic
political risk forecasting models are available. In sum, there are 2
basic vays to approach measurement of political risk: the
country-specific route (also called the macro approach) and the
company-specific route (frequently called the micro approach). The
main interest of our research is to study how firms that already have
had foreign investments decide hov to structure its investment to
minimize political risk. The configuration of the firm's investment
will, in large measure, determine its susceptibility to changing
government policies. Therefore, we will focus on the micro approach to
study the different impact of political risk on different companies in
particular industries.
Classification of Political Risk
Several schemes for the classification of political risk can be
observed in the literature. Following the micro approach, we will focus
on the type which attempts to classify political risks based on the
structural and functional elements of an organization (Robook 1971;
Root 1972; Lax 1983; Overholt 1982). As a matter of fact, the main
theme of this project is to investigate how Hong Kong investors view
political instability with respect to the functional aspect of a
business organization.
Through the pioneering work done on this subject by Franklin Root
(1972), political risks can be classified as:-
(1) Transfer Risk - risk stemming from government policies that
restrict the transfer of capital, payments, products, technology,
and persons into and out of the host country.
(2) Operational Risk - risk arising as a result of host government
policies, regulations, and administrative procedures that directly
constrain the management and performance of local operations in
production, marketing, finance and other business functions.
<3) Ownership Control Risk - risk brought about as a result of host
government policies or actions that inhibit ownership and/or
control of the local operations of an international company.
Basing on such criteria, Overholt (1982) suggested that political
risk can be classified as asset risk (threatening protection of
assets), organization risk (similar to operational risk by Root),
16
operations risk (related to access to raw m a t e r i a � � r i g h t s of import
and export) and market risks (threatening growth of domestic markets
and fair competition, access to foreign markets). On top of the
classification by Root, Lax (1983) further suggested 2 classifications,
namely, administrative/ statutory risks (refer to change in the
regulatory climate) and contractual risks (covers the bundle of
supplies/price issues embodied in non-equity, non-service agreement
transactions).
To sum up, a review of the literature suggests that political risk
is an applied issue and can be measured and analyzed in an operational
aspect. Hence we attempt to define the dependent variable of political
risk operationally under the 3 broad categories of transfer,
operational and ovnership-control risk as follows:-
Transfer Risks - Tariffs on exports
- E x p o r t restrictions
- T a r i f f s on imports
- I m p o r t quotas
- D i v i d e n d remittance restrictions
- C a p i t a l repatriation restrictions
- N a t i o n a l i t y restrictions
Operational - Price controls
Risks - Increased taxation
- E x p o r t commitments
- L o c a l content requirements
- L o c a l sourcing requirements
- F i n a n c i n g restrictions
Owner-control - Economic sector limitations on investments
Risks - Abrogation of proprietary rights
- F o r e i g n ownership limitations
17
- P r e s s u r e for local participation
- E x p r o p r i a t i o n
- C o n f i s c a t i o n
Managing Political Risk
Buckley (1987) suggested that political risk may be controlled at
the pre-invGstment stage or in the course of operations, or both. He
identified 4 approaches aimed at minimizing risk in the pre-irwestment
period: avoidance, insurance, negotiating the environment and
structuring the environment. In the course of investment which is the
case in our research, Buckley suggested other operating policies such
as: vertically integrated production (to keep the host government
dependent on the investor for supplies, research and development and
proprietary facilities etc.), single global trademark of product (that
cannot legally be duplicated), encouraging external local
shareholders, obtaining unconditional host government guarantees,
planned divestnent, short-term profit maximization (includes policies
of withdrawing Baximum amount of cash from local operation; keeping
reinvestment to minimum; deferring maintenance expenditures and
eliminating training programmed), changing the benefit/cost split with
the host country (such as policies that ensure benefits accrue
locally; training local workers and managers; manufacturing a wide
range of products locally as substitutes for imports), encouragement
of local stakeholders including customers, suppliers, employees,
bankers and so on, and adaptation (to the potential risk of
expropriation by formulating policies to earn profits by entering into
licensing and nanagement agreements). Alan Shapiro (1982) also shared
most of Buckley's findings and views.
Schmidt (1986) indicated that the nature of foreign direct
1 8
investment can be captured in 2 sets of independent variables. The
first set of variables, the general nature of investment, is cierived
from production characteristics of the foreign operation such as
categorizing into conglomerate, vertical and horizontal investments.
The second set of variables, the special nature of investment is
derived form the following attributes: sector of economic activity,
technological sophistication and pattern of ownership.
When considering the background environment of our research, a
recent article by Brahm (1989) introduced several other techniques
practised by Hong Kong and foreign investors in China to hedge against
risk. These are: diversification, establishing Hong Kong company with
limited liability and fail-safe planning. Fail-safe planning denotes
designing corporate or trust structures to avoid situations arising
from political instability. Common techniques include establishing an
overseas company to function as a holding company for China activities
or establishing a sister company that loan money by taking mortgage to
the Hong Kong company in attempts to safe guard assets.
To sun up, a review of the literature suggests that there are a
variety of techniques and approaches that can be used to manage
political risk when it arises and hence minimize the consequential
loss. The fact that similar variables were surfaced in our
unstructured and structured interviews reinforced our original
thinking. After incorporating the specific environment between Hong
Kong and China, a list of variables which may affect the political
risk of Hong Kong investors with their PRC investment is given below.
Hong Kong investors may adopt various techniques to change the
magnitude of these variables, thereby reducing the political risk.
- p e r c e n t a g e of production capacity based in China
- p a y b a c k period for the investment in the PRC
19
- m a g n i t u d e of initial capital outlay
- d e g r e e of insurance coverage
- a b i l i t y to diversify to other related or unrelated business
- a b i l i t y to adapt to changes
- d e g r e e of vertical integration in the business of the firm
- e a s e of substitution by Chinese counterparts
- d e g r e e cf technological sophistication
- p e r c e n t a g e of product serving the PRC market
- d e g r e e of PRC participation in ownership and control
- d e g r e e of capital repatriation out of China
- e x t e n t to which the firm depends on local supply of raw
material
- e x t e n t to which the firm depends on infrastructures support
. <
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20
CHAPTER V
THEORETICAL FRAMEWORK
After conducting a literature search as well as some structured
interviews with a fev industrialists who have actual involvement in the
field, a number of factors are found to have effect on the political
risk faced by firms vith investment in China. These factors can be
grouped into 3 different categories and the theoretical framework is
depicted in Fig. 1.
Some of these factors are found to influence the political risk
faced by a firm by affecting the degree of exposure of the firm to
political risk. For example, the higher the percentage of production
capacity a firm bases in China, the greater the firm is exposed to
political risk. Similarly, investments with longer payback periods or
vith higher initial capital outlay will also make the firm more exposed
to political risk. Firms with lower political insurance coverage,
lower degree of diversification or firms that are less adaptable to
external changes are also susceptible to political change.
On the other hand, some of these attributes are found to increase
the political risk by making the host government, China, more
interested in constraining the business operation of the investment.
The host government is less likely to subject vertically integrated
investment to economic restraint by applying policy measures than they
are to intervene in conglomerate investments, as vertically integrated
investments often offer a substantial inflow of foreign capital during
f. \
percentage of production capacity based in China '
payback period for the investment in the PRC _ —
initial capital outlay
fe^osure of the firn�
lack of insurance coverage ] to political risk
inability to diversify to ‘‘ ^^^
other related or unrelated — business
inability to adapt to changes
lack of vertical integration~~ in the business of the firm
ease of substitution by Chinese counterparts “ p / ' p o l i t i c a l、
{-I V risk J lack of technological I [interest of the ^ 乂 sophistication host government
丨 in constraining �
percentage of product serving _ ^ the business
the PRC market P operation of the
f i rrn lack ot PRC participation i n | ^ ‘
ownership and control '“‘
degree of capital repatriation! out of China
extent to vhich the firm depends on local supply of i ^ - — 一 “
raw material [susceptibility to —
~ - political change extent to which the firm ^
depends on infrastructural 」 support
Fig. 1 Theoretical Framework
2 2
start-up and are frequently export-oriented. Following the same token,
if the majority of the product is ueed to serve the PRC market and the
product can easily be substituted by Chinese counterparts, the host
government will be more inclined to interfere as it appears that the
firm is making private profit by exploiting the benefit of the host
government population. On the other hand, the higher the level of
technological sophistication is, the less likely the operation is to be
a target of government constraints, as the host government will
treasure the desired transfer of technological knov-hov to the local
economy. Moreover, the pattern of ownership also counts. As local
citizens often press their government to demand greater domestic
control over foreigners, allowing a certain degree of local
participation by various modes of joint venture can often be an
effective means to minimize political risk.
Lastly, some factors are found not to influence the firm directly,
but the firm actually suffers as a result of its operations being
affected by political instability. For example, the supply of locally
sourced raw material may be so affected by social unrest or by a change
in the policy of the host government that the production may have to be
halted. Likevise, the dependence of the investment on local
infrastructures support may also affect the degree of political risk as
any social unrest may upset the transportation of rav material or
finished product into and out of China.
On the basis of the above arguments, we theorize that there would
be correlation between political risk and each of the factors discussed
above as indicated on the theoretical framework shown in Figure 1.
2 3
CHAPTER VI
HYPOTHESIS
In the theoretical framework developed above, the relationships
between the dependent variable (i.e. political risk) and the majority
of the attributes discussed above have been well proven in previous
literatures. Positive correlation exists between the attributes and the
dependent variable, political risk. This is also reinforced in our
unstructured / structured interviews with practitioners with
manufacturing bases in China. Hence, business strategies to be adopted
by firms should be aimed at reducing the magnitude of these attributes,
thereby reducing the political risk of the firm. The aim of the present
study is to find out which of these business strategies are most
pursued by industrialists in their investments in the PRC.
It appears, from the interviews carried out, that the general
payback period for Hong Kong manufacturers in setting up factories in
China vill not normally exceed 3 years to guarantee return and to
maximize profit in the short term. Therefore, it is expected that the
risk associated with an investment with longer payback period or with
heavy initial capital outlay will expose the firm to a much higher
political risk. Hence, it is intended to examine the correlation
between the payback period and the capital cost of investment with
political risk in this study.
From the structured interview carried out with industrialists in
the garment and electronics industries, it is revealed that the garment
24
industry can be considered as a labour intensive one requiring � e s B
capital investment when compared with the electronics industry.
Although the electronics factories in China are usually set up for the
manufacture of less sophisticated electronics items requiring a
substantial amount of labour input, the cost required for setting up an
electronics factory is nevertheless higher due to the expensive
manufacturing plant required. Hence, it is expected that the degree of
exposure to political risk is different between garment and electronics
industries. It is postulated that the business strategies adopted by
Hong Kong manufacturers vith their PRC investment will be different for
the garment industry and the electronics industry.
It is found that large manufacturing firms are usually not merely
involved in production, but are at the same time participating in
import/export, trading, marketing, wholesaling or even retailing
business. Some of these firms even diversified to other related or
unrelated business. As the profit made by setting up a production base
in China may only contribute a small part to the total earnings of the
firm, the impact of intervention from the host government on the firm
may be relatively small. Comparatively speaking, a small manufacturing
firm vith less vertical integration and with less diversification will
be more susceptible to political change. Hence, it is also postulated
that the strategies to be pursued by large manufacturing firms will be
different from those favored by small ones.
In light of Hong Kong's return to China in 1997, investors may wish
to consider means of protecting their Hong Kong companies for carrying
on China trade and investment in the long run. Hence, its is also
postulated that the long term business strategies pursued will be
different from their respective short term ones. It will be interesting
to investigate the areas of difference.
2 5
The following hypotheses are therefore developed for this research:
HYPOTHESIS 1 There is significant difference in the business
strategies pursued by Hong Kong manufacturers with their
PRC investment between the garment and electronics
industry;
HYPOTHESIS 2 There is significant difference in the business
strategies pursued by Hong Kong manufacturers with their
PRC investment between small firms and large firms;
HYPOTHESIS 3 There is significant difference between the long term and
short term business strategies pursued by Hong Kong
manufacturers with their PRC investment.
The difference in business strategies postulated in the above
hypotheses have yet to be discovered in this research.
26
CHAPTER VII
RESEARCH DESIGN DETAILS
Type and Nature of Study
The purpose of this research is to establish the relationship
between the various attributes and political risk, and which of these
attributes contribute most to political risk under different
circumstances. It is hoped that, with this study, the most preferred
ways of reducing political risk can be identified.
Study Setting and Time Horizon
In this study, the views of practitioners in the manufacturing
industry towards the political risk associated with their PRC
investment and their business strategies to reduce the risk will be
sought. Hence the study setting will be a noncontrived one. The data
for this research are to be collected over a 8-week period. Because no
previous research has been done by the research team on this subject,
nor is any subsequent extension of the research contemplated, the study
is cross-sectional in nature.
Unit of Analysis
The research attempts to establish the business strategies adopted
by manufacturers to protect themselves against political risks with
their PRC investments. Hence, the unit of analysis will be firms
registered in Hong Kong with some degree of production capacity
relocated into China. Only firms in the garment and electronics
27
industry will be chosen as the subject of our study.
2fi
CHAPTER VIII
POPULATION AND SAMPLE
Theoretically, it is possible to identify an exhaustive list of all
the Hong Kong manufacturing firms in the garment and electronics
industry that have set up their factories in China. Any firm that has
set up a factory in the PRC has to obtain various approvals, including
an approval from the Foreign Trade and Economic Commission. Hence, an
exhaustive list of the identity of the foreign parties with their
names, addresses and other information could ideally be obtained from
the records of the Conmission. However, due to the subject now being
studied is politically sensitive and due to some technical
difficulties, it is impractical under the present circumstances to
obtain such lists.
An alternative approach to identify the sampling frame is to make
use of the list of local manufacturers in the Directory of Hong Kong
Industries (1989 edition) published by Hong Kong Productivity Council.
This directory has been compiled on the basis of the latest list of
local manufacturing establishments provided by the Census and
Statistics Department and other lists of member firms maintained by
Hong Kong Government and industrial organizations. The directory
provides a detailed reference to over 5000 major manufacturing
companies in Hong Kong. Information available in the directory includes
the full names of companies, registered addresses and factory
addresses, contact telephone numbers, names of proprietors or
2 9
directors, contact persons, employment size of the companies,
production capacities, average annual turnover, paid-up c a p i t a� etc.
The lists for textiles, wearing apparels and electrical (including
electronic) machinery are used in this study. From various sources of
information, it is estimated that more than 807. of Hong Kong's garment
and electronics companies have operations in the mainland. The sampling
procedure described below will be undertaken to extract the names of
the companies which have relocated their manufacturing plant to the PRC
from the directory in order to arrive at a representative sample from
the list for the present study.
3 0
CHAPTER IX
SAMPLING METHOD
On the assumption that the manufacturers which have set up
factories in the PRC are randomly distributed in the Directory of Hong
Kong Industries, a stratified systematic sampling method has been used
to obtain the sample as follows:
(1〉 Extract the lists for garment and electronics industries from the
Directory of Hong Kong Industries.
(2) With the aim of obtaining approximately 100 responses and assuming
a response rate of about 20%, a sample size of about 500 is
selected from the list, with 250 firms selected from each industry.
Since there are about 3800 garment firms and 1800 electronics firms
in the directory, every 15th name has been chosen from the list of
garment firms and every 7th name has been chosen from the list of
electronics firms to form our sample size. Assuming that 80% of the
respondents will indicate that they have some form of production
capacity on the mainland, it is expected that 80 useful returns
will be available for the analysis.
(3) After the sample list is compiled, about 10*/., i.e. 25 companies,
from each industry is be chosen randomly from the list for a
pretest. Details of the pretest will be given in the following
sections.
<4) In the event that some companies contacted do not have any form of
venture in the PRC, the company will be dropped and will not form
31
part of the sample.
/
• V.
3 2
CHAPTER X
DATA COLLECTION METHOD
Method
Questionnaires are used as the research instrument in this part of
the study. The questionnaires will be sent to executives who are in the
position to make strategic decisions for their firms. To enhance
understanding and familiarity to general Hong Kong manufacturers, the
questionnaire has been written in both Chinese and English. The
questionnaire has been designed to be straight forward, with close-end
questions and is easily understandable. In view of the fact that
executives responsible are usually busy, it is decided that a mail
survey would be appropriate. A copy of the questionnaire is given in
Appendix 3.
Questionnaire Design
The questionnaire consists of three parts: background information,
current problems encountered and business strategies.
Part A: Background Information
This part is devoted to obtaining the background and demographic
information of sample firms. Information like the nature of business,
the total number of vorkers employed, the percentage of production
capacity based in China, the magnitude of investment in PRC and the
average payback period for the investments in China will be elicited.
3'J
Part B: Current Problems Encountered by PRC Ventures
After the political instability in China in June, the manufacturers
may face a new set of problems that are unanticipated before with their
investments in China. This part of the questionnaire is designed to
obtain such information in helping us to assure the different
independent attributes of political/economic risks as perceived by
general Hong Kong manufacturers in the same section. The respondents
are also required to rate against each of the possible problems the
degree of seriousness that they perceive with their PRC investment. The
respondants are also asked to indicate their level of confidence
regarding their PRC investments.
Part C: Business Strategies
In this part of the questionnaire, we have used an exhaustive list
of possible business strategies for reducing the political risk (which
operate by reducing the magnitude of the contributing attributes
identified as the independent variables in the theoretical framework
given in Figure 1). The respondents are required to answer whether each
of these strategies will be adopted by the firm to reduce risk. A five
point scale, from 'certainly yes' to 'certainly no' is used. It is
expected that, when such information is grouped according to the size
of the firm or according to the type of industry, useful results as to
what business strategies are considered to be most useful in reducing
risk can be obtained. When these results are compared across different
groups, Hypotheses 1 and 2 can be tested. Moreover, since the short
term strategies will be expected to be different from the long term
ones, both long term and short term strategies are requested in the
questionnaire so as to test Hypothesis 3.
34
Procedures
In the pretest, the questionnaire were sent to company
representatives of each of the 50 firms selected from the sample list,
vith stamped envelope and return address to encourage response. It is
originally expected to amend the questionnaire according to the
response obtained from the pretest and to issue the amended
questionnaire to the remaining 450 firms. However, the results of the
pretest has made necessary a major amendment to the data collection
method.
Results of Pretest
Of the 50 questionnaires sent, only 2 questionnaires from
electronics manufacturers were received, which represent a response
rate of only 8X for the electronics industry and 0% from the textile
industry. When investigating into the reasons for the low response rate
by telephoning the manufacturers to which the questionnaires have been
sent, it is found that the topic is considered too sensitive for the
roanufacturers. This is especially true for the textile and apparels
industry, which is comparatively speaking a traditional industry.
Moreover, for those garment manufacturers who have relocated most of
their production capacity into China, they are reluctant to disclose
the actual production capacity of their factories in China. This is
because these manufacturers are more or less infringing upon the rules
governing the origin of production for exporting to the US or EC by
relocating part or all of the production process into China and
exporting the finished products as "made in Hong Kong". Although the
Hong Kong Government has taken positive steps to curb this continued
infringement of trade agreements, this is still prevailing in the
textile and apparels industry and this poses a great impediment to
3 5
surveying using mailed questionnaires. A major amendment to the method
of data collection is therefore necessary.
Revision to the Method of Data Collection
Before considering the appropriate amendments to the method of data
collection, it is necessary to review the aim of our present study. Our
original intention is to explore the business strategies pursued by
Hong Kong manufacturers, in particular the two most representative
industries, garment and electronics, for both small and large
companies, to reduce the political risk associated with their PRC
investment. Although the hypotheses presented in Chapter VI are
centered around the difference in the business strategies pursued by
different groups of Hong Kong manufacturers, emphasis should be placed
on exploring the actual business strategies pursued by different groups
of manufacturers in general and not on the difference itself. Although
it would be best if the difference in business strategies can be
established on a statistical basis by putting the hypotheses in Chapter
VI to statistical tests, it would be as useful even if we have to limit
our study to an exploratory one.
After careful thought and consideration of the response from our
pretest, it is decided that structured telephone interviews should be
conducted. The main advantage of structured telephone interviews is
that we can be able to explain to our interviewee the purpose of our
study, clarify doubts and ensure that the responses are properly
understood by repeating or rephrasing the questions. The number of
structured interviews to be conducted is dependent on the time and
resources available and such interviews can be stopped when we consider
that sufficient information is obtained for the purpose of our study.
The mailing list of manufacturers we have sorted out previously for
36
the mail questionnaires is used for our structured telephone interview.
Names of firms are chosen randomly from the list and the directors or
persons in-charge are telephoned to arrange for an interview. As
expected, our requests for telephone interviews have also encountered
rejection by most of the respondents on the ground that they are busy,
or that they are reluctant to release information to outsiders. In the
end, twenty fairly successful telephone interviews were conducted, ten
for each of the two chosen industries and the results are presented in
the following section. The questions listed in the questionnaire have
been used for our structured telephone interview. Nevertheless, in
order to limit the duration of each telephone interview to within 15
minutes, which is a suitable time span in keeping the respondents
interested in the conversation, only questions strictly essential to
our study have been asked. As a result, our questions are centred
around Q16 of the questionnaire and a couple of others concerning the
background inforraation like the number of workers employed, the
attitudes tovards the future level of investment in China etc. The
questions given in Part B of the questionnaire regarding problems
currently being encountered by PRC ventures as compared to those before
June last year have been deliberately omitted as it can generally be
established from the unstructured interviews conducted previously that
there has been no significant change. Moreover, regarding the business
strategies to be pursued in Q16, a three point scale using "will",
•neutral" and "vill n o t � instead of the five point scale shown in the
questionnaire is used in order to avoid complication for collecting
information through telephone.
37
CHAPTER XI
INTERVIEW RESULTS
The results of the telephone interviews, categorized by the type of
industry, is summarized in Tables 1 and 2.
The results of the interview given corresponded quite well with the
findings ve obtained from the structured and unstructured interviews
conducted vith investment advisors, general traders and manufacturers
in the garment and electronics industries earlier. Generally speaking,
the continued reliance of Hong Kong manufacturers on the abundant and
cheap production capacity available in China to support their
industries and to •aintain their competitiveness in the world market
has made Hong Kong inseparable from China, or at least, the southern
part of China. Even after the turmoil of June 4 and with reduced
confidence in whether China will continue vith its open-door policy in
the future, Hong Kong aanufacturers can only continue, or even increase
their investment in China in order to survive.
Eventhough the nunber of samples collected in this exercise is not
enough for hypothesis testing, some useful information can still be
obtained when comparing the responses of the electronics industry with
those of the garment industry. Both differences and commons in
strategies to be pursued vere cited and analysed in the later chapters.
38
TABLE 1
RESULTS OF TELEPHONE INTERVIEWS FOR THE GARMENT INDUSTRY
Out of the ten firms in the garment industry surveyed in the telephone interview, the number of firms that will/will not pursue the following short term/long term strategies for their PRC investment are:
SHORT TERM LONG TERM
will will vill neutral not will neutral not
1. divest to other South East Asian countries 1 0 9 2 3 5
2. pursue political
insurance coverage 0 0 10 0 2 8 3. diversify the investment
in PRC to other unrelated
business 0 2 8 1 3 6 4. increase the flexibility
of the firm to changes 8 2 0 10 0 0 5. integrate the business
vertically to trading
and retailing 5 2 3 5 4 1 6. differentiate the product
to avoid being easily substituted by local
counterparts 4 2 4 4 4 2 7. move production to higher
technological sophis-tication 2 1 7 4 4 2
8. increase the percentage of production for export comparing to local domestic sales 8 1 1 8 2 0
9. increase the stake of PRC partners in the investment 0 0 10 0 0 10
10. reduce the amount of
capital investment 0 2 8 1 2 7
11. secure raw material supply by, for example, importing 4 3 3 5 4 1
12. reduce the dependence of factories on local infra-
structural support 7 3 0 9 1 0 13. reduce payback period 1 4 5 2 5 3
46
TABLE 1
RESULTS OF TELEPHONE INTERVIEWS FOR THE ELECTRONICS INDUSTRY
Out of the ten firms in the electronics industry surveyed in the telephone interview, the number of firms that will/will not pursue the following short term/long term strategies for their PRC investment are:
SHORT TERM LONG TERM
will will will neutral not will neutral not
1. divest to other south east asian countries 4 1 5 5 2 3
2. pursue political
insurance coverage 3 0 7 3 4 3 3. diversify the investaent
in PRC to other unrelated business 3 2 5 6 2 2
4. increase the flexibility
of the firm to changes 7 3 0 8 2 0 5. integrate the business
vertically to trading
and retailing 2 3 5 4 3 3 6. differentiate the product
to avoid being easily substituted by local
counterparts 5 2 3 7 1 2 7. move production to higher
technological sophis-tication 0 3 7 4 4 2
8. increase the percentage of production for export comparing to local domestic sales 10 0 0 9 1 0
9. increase the stake of PRC
partners in the investment 0 0 10 0 4 6 10. reduce the amount of
capital investment 1 0 9 1 4 5 11. secure raw material supply
by, for example, importing 8 1 1 8 2 0 12. reduce the dependence of
factories on local infra-
structural support 2 5 3 4 6 0 13. reduce payback period 0 1 9 2 2 6
4 0
CHAPTER XII
ANALYSIS OF RESULTS
Difference in Strategies Pursued between the Garment
and Electronics Industries ,
As expected, so»e differences are found in the strategies pursued
between the garment and electronics industries and the differences are
discussed below and are summarized in Table 3.
Both garment and electronics industries have to relocate their
•anufacturing base to China or to other South East Asian countries to
reduce the production cost to remain competitive. In fact, the garment
industry has found this need to relocate much earlier than the
electronics industry. South East Asia has been chosen as the most
suitable place to relocate in the 60's or 70's. However, since China
opens its doors to foreign investments, garment manufacturers find it
Bore economical to set up factories in China and this has ever since
attracted the majority of the garment manufacturers into China. In
fact, the considerations of garment manufacturers in relocating their
factories are quite different from those of the electronics industry.
Unlike the electronics industry, garment manufacturers are constrained
by quotas and rules of origin. Except for those less developed
countries where the export quotas have not been fully utilized, garment
wanufacturers cannot easily relocate to make use of the cheap labour
and rents available in these countries. So far, the majority of the
41
TABLE 1
DIFFERENCE IN STRATEGIES PURSUED BETWEEN THE GARMENT INDUSTRY AND THE ELECTRONICS INDUSTRY
GARMENT INDUSTRY ELECTRONICS INDUSTRY
1. Relocation of factories is 1. Relocation to other South East constrained by availability Asian countries which still of quotas and rules of origin; enjoy GSP status is quite
therefore difficult to relocate attractive to some large to other South East Asian electronics manufacturers, countries and is compelled to Overseas expansion is one of maintain or even expand the the possible strategies, though
production base in China. existing ties with China will
be maintained.
2. Garment manufacturers prefer 2. Electronics manufacturers vertical integration to prefer horizontal integration horizontal integration. It is to vertical integration, possible to expand the business Electronics manufacturers are to trading and retailing in more prepared to diversify the order to reduce the dependence investment to other business of on revenue generated from related technology like toys production. and plastics industry.
3. Garment industry depend heavily 3. The majority of the rav on China for supply of rav material for the electronics material. To reduce the risk of industry is imported and the irregular rav material supply political instability in China affecting production, increasing will not pose a serious the level of stock of raw problem regarding the supply material is one of the possible of raw material.
strategies.
4. Political risk insurance not 4. The possibility of buying quite appealing to manufacturers insurance to hedge against on the garment industry. political risk appears to be
acceptable to some of the electronics manufacturers.
4 2
garment factories set up in China are for export to countries � i k e
Japan where there are no quota restrictions, or for export to the US or
the EC using the quotas for China. Nevertheless, a sizeable amount of
these products produced in China are thought to have been transported
to Hong Kong and tagged as "made in Hong Kong" for export to the US and
the EC using the quotas for Hong Kong illegally. Because of the
difficulties regarding the uee of quota, the relocation of
manufacturing base is not easy for the garment industry. The investment
environment in China (cheap labour, low rent and abundant supply of raw
material) is so much more attractive than in other South East Asian
countries that garment manufacturers find it economically not
justifiable for divestment to other South East Asian countries. This
explains why only one out of ten garment manufacturers surveyed has
indicated his intention to divest to other South East Asian countries
in the short terra even other the event of June 4.
On the other hand, the electronics industry is more prepared to
relocate to other South East Asian countries, notably Thailand. Out of
the ten electronics manufacturers surveyed, four of them is considering
divesting to other South East Asian countries. In fact, some of these
South East Asian countries do offer comparable or even better
investment terms than China. Thailand and Malaysia for example, still
enjoy Generalized System of Preference treatment and the accompanying
lower tariffs for exports to the US. Moreover, these countries have not
been affected by the protectionist sentiments from major markets such
as the US and the EC that are plaguing Hong Kong and China in the form
of dumping accusations. Therefore, unlike the garment industry which
vill continue to expand their manufacturing base in China, overseas
expansion is considered to be one of the possible strategies for
electronics manufacturers, although existing ties with China will be
4 3
maintained.
Another difference in strategy between the garment industry and
the electronics industry that can be found from this survey is that
electronics manufacturers are more prepared to diversify the investment
to other business with related technology, like toys and plastics
industry. Out of the ten electronics manufacturers surveyed, three of
them indicated that they have, or vill diversify the investment in the
short terra and six of them will do it in the long run. In fact, the
toys and plastics industries are quite related to the electronics
industry in that roost toys are composed of electronic and plastic
components and plastic parts are required for most electronic products.
Moreover, the characteristics of the three industries in respect of
production, aanagement, trading and marketing are quite similar, making
the entry barrier for the manufacturers of one industry into another
relatively lov. On the other hand, the garment manufacturers are more
reluctant to enter into other business. Of the ten garment
manufacturers surveyed, only three of them have plans to diversify to
other unrelated business. After all, the garment industry is a more or
less traditional industry with the practitioners in it more reluctant
to attempt diversification. On the other hand, vertical integration to
trading and retailing appears to be one of the more favoured strategies
for large garment manufacturers when compared with the electronics
industry. This is because the price markup from ex-factory to sales is
usually very high conpared to the production cost for the garment
industry and therefore expansion of the business to trading and
retailing would be more profitable.
For the garnent industry, timely completion of orders to meet
tight delivery schedules is very important because the clothing
industry is seasonal. Any delay in delivery will affect the customer's
44
sale campaigns seriously and would subject the manufacturere to heavy
penalty. Timely completion of production would of course depend on a
steady supply of raw material. In the past few years. Hong Kong
manufacturers have depended on China as one of the major sources of
supply of cloth and fabric for production in China, especially for
garments aiming at the low end of the market. Ever since the event of
June 4, the supply of raw material has become irregular and securing a
steady supply of rav material has become one of the major concerns for
garment manufacturers to reduce the risk associated with their
investment in China. One way of achieving this is to source raw
material from countries like Japan or Taiwan in case of shortage in
supply (of course at a much higher cost). But a more favored strategy
is to increase the level of stock of raw material to provide a buffer
against shortage in supply. On the other hand, the majority of the raw
material for the electronics industry is imported and the political
instability in China will not pose a serious problem regarding the
supply of raw material.
Another interesting difference in strategies between the two
industries is their attitude towards political risk insurance coverage.
Although the concept of insuring against political risk has not been
widely promulgated amongst Hong Kong manufacturers, three out of the
ten electronics manufacturers did indicate that they were interested in
exploring the possibility of buying insurance to hedge against
political risk. On the other hand, none of the garment manufacturers
contacted have interest in pursuing this strategy.
Difference between Short Term and
Long Term Strategies
It can be observed from the responses to the survey that there is
4'j
little difference between short term and long term strategies. In fact,
the success of Hong Kong manufacturers in competing with the rest of
the world lies in the flexibility and adaptability of Hong Kong
manufacturers towards changes in the world market. This is because the
manufacturing industry in Hong Kong is dominated by a large number of
small to medium sized factories who are interested only in investments
of quick return and are constantly looking for niches in the market and
are ready to react soonest possible. It is found in our study that
three years is almost the longest payback period acceptable to Hong
Kong manufacturers for their investment in China. Because of their
limited capital and management capacity, these manufacturers are
unvilling to over-commit themselves to any long term investment which
vould result in a reduction in their flexibility to changes. Hence,
vith the exception of some large manufacturers who can afford to do so,
it can be said that long term planning is lacking in the manufacturing
industry of Hong Kong.
The question of long term strategies can easily lead people to
think of the problem of 1997. When asked about whether 1997 will be a
dividing line in their business planning, most manufacturers responded
that vith the existing heavy investment in China and reliance on China
as a production base, their life line has already been tied to the
economy of China. The existing tie with China is already very intricate
and it is virtually impossible to separate. It is the huge work force
in South China that is supporting the industry of Hong Kong. Although
the onset of the 1997 handover is a psychological barrier yet to be
surmounted, it just makes no difference whether it is before or after
1997 and the dependence on China will continue. There is no way for
Hong Kong manufacturers to pull out of the mainland, as they have
already invested too much in it.
53
Difference in Strategies between Small
and Large Manufacturers
Faced with mounting protectionism, increased competition in world
markets, acute labour shortage and increasing production cost, a � �
manufacturers in Hong Kong, large and small alike, are looking for
possible sites for relocation of their production base. China,
especially the Pearl River Delta region, has been the most favoured
place for relocation. Until now, about 807. to 90% of the garment and
electronics manufacturers in Hong Kong have engaged in some kinds of
production arrangement in China. Some of the smaller firms have even
relocated all their production capacity into China whilst maintaining
an office in Hong Kong for marketing and trading.
It is observed that the unrest in China last June might have
fueled diversification in Hong Kong industrial investment to other
countries, notably the Philippines, Malaysia and Thailand. However, the
vievs of large and snail manufacturers are found to be quite different
in this respect. For small manufacturers, what they want is a place,
with abundant supply of labour and low rent where they can earn money
out from investments and the benefits they are enjoying for their
investment in China are hardly comparable elsewhere. It is financially
not viable for them to withdraw from China and invest in other South
East Asian countries so long as their factories in China continue to
produce goods smoothly. Therefore, for small manufacturers, their
strategies will still be to continue with their investment in China,
though with more caution, after the turmoil of June 4.
On the other hand, although the majority of the large
manufacturers are still quite confident with their China investment,
they are compelled to expand their production base in other South East
Asian countries in order to maintain foreign buyers' confidence. The
4 7
clients are very concerned with continuity of supply. If the majority
of the production capacity is maintained in China, the customers will
feel uneasy. After all, it is unwise to put all the egge in one basket.
Therefore, even if the production cost for setting up factories in
Thailand or Malaysia are higher compared with their plants in China,
large manufacturers are compelled to please their buyers by increasing
their investment in South East Asia until the dependence on China has
been reduced to a comfortable level. The capital tied-up in such
relocation will be immense and is not affordable by most of the small
to medium sized manufacturers.
>
4 8
CHAPTER XIII
GENERAL ATTITUDE OF HONG KONG MANUFACTURERS TOWARDS POLITICAL RISK
One-country Tvo-systems Concept
Since the Sino-British Joint Declaration in December 1984, Hong
Kong has been in a stage of transition because it will revert to China
on 1 July 1997. According to the Declaration, Hong Kong will become a
Special Administrative Region of China, retaining her capitalist
socioeconomic system for another fifty years under one country, two
systems. As such, Hong Kong people in general are facing a very
peculiar event and expecting a change in sovereignty to take place.
Within a few years from now. Hong Kong will become part of China.
Consequently, Hong Kong manufacturers vill be operating under the PRC
government and hence, their general concept of political risk may be
quite blurred or rather more concerned with economic risk. The fact
that our survey shows many respondents do not regard 1997 as a dividing
line in strategy planning further support this point.
'Open Door" Policy of China
In the face of increasing competition from the other three
dragons, as well as high land cost and scarce labor supply in Hong
Kong, the only solution for most Hong Kong manufacturers is to shift
their production base across the border. With China adopting its ”open
door" policy, Hong Kong manufacturers can utilize the cheap labor and
abundant land in order to remain competitive or strictly speaking, to
4 9
survive. Some people even commented that Hong Kong manufacturers were
left with not much choice. They could either choose to go ahead with
their investment or business in China or etay out of the business. As
most of them have chosen to remain in the business, their success or
profitability will have to depend on whether the "open door" policy is
successful or if China will continue to adhere to that policy. Due to
the fact that Hong Kong has been playing an important role as the major
source of earnings in foreign exchange for China and the fact that
China vill not want to see this mutual beneficial economic linkage
being dampened and widened, most Hong Kong manufacturers by and large
took a more optimistic view in further cooperation with China.
Special Situation of China
China is a large country populated with more than 1 billion people
accounting for more than 25% of the world's total population. Within
the nationality, there are different cultures and social practices with
different dialects. The underdeveloped nature of the telecommunication
system, coupled with stringent control by the government, has prevented
free flow of information into and within the country. As many
experienced China trader or businessmen have commented, it is very
difficult to generalize situation in China. During the crackdown of the
unrest in Beijing, much disorder and interruption to business
operations was cited in the capital whereas in the Guangdong
municipality, the city order was virtually undisturbed. Our survey
results also indicated that Hong Kong manufacturers who had investments
in the southern provinces generally agreed that the June 4 incident had
no special bearing on their normal business operations. Furthermore, no
nev problems were encountered as a consequence to the June event.
5 0
Transfer Risk
When we study the major concern as well as the potential threats of
political risk to Hong Kong manufacturers, it is found that among the 3
broad categories, they are most concerned with the transfer risk. Most
of them revealed that their worries included difficulties in getting
their dividend remitted out, foreign exchange balancing, product
marketability, maintaining a stable environment for production,
maintaining an abundant supply of cheap labor and securing good
infrastructural support etc. Most of them considered expropriation,
confiscation etc as quite remote a kind of risk. It was also found in
the survey that most respondents did not envisage any new problem
arising after the June 4 incidence as compared to the condition before
as far as the possible interruption to the operation of business on the
production end is concerned.
•jl
CHAPTER XIV
WHAT BUSINESS STRATEGIES HONG KONG MANUFACTURERS WILL PURSUE
Problems or Difficulties Faced bv
Hong Kong Electronics Manufacturers
Hong Kong manufacturers generally have to face a lot of other
business problems on top of the political risk associated with their
PRC investment which is only one of the many factors affecting the
business. The strategies to be pursued shall take into account all such
influencing factors. From our analysis, these other factors include the
acute shortage of engineers and skilled workers, fluctuation of Hong
Kong dollar with respect to Japanese Yen, Korean Won and New Taiwan
dollar, graduation from the US GSP status, dumping accusation by the
EC, keen competition from Taivan, Korea and Singapore and lack of
support from the government to improve the technology level of the
industry.
Strategies to be Pursued by Hong Kona
Electronics Manufacturers
According to a survey done by Hong Kong Trade Development Council
(HKTDC, 1989), about 90% of the local electronics manufacturers are now
engaged in some for«s of production arrangement in China. The total
number of electronics establishments in Hong Kong as at March 1989 was
1337. Most of the factories are small with 80X of them having less than
50 workers. Despite the fact that there are only a small number of
52
large factories, they accounted for a high percentage of the total
exports. Irrespective of their sizes, the strategies pursued by most
electronic manufacturers with their PRC ventures in general are to
continue with their investment in China to lower production cost. This
is the most important strategy which may be considered as the
fundamental. Facing the keen competition from the other three dragons,
to be able to lover production cost will mean increased
competitiveness. Due to cultural linkage and geographic proximity,
investment in China is a very logical solution. Even after June 4
suppression, most electronics manufacturers would not consider reducing
their present level of investment in China. Some optimistic investors
even consider expanding their production level in China. Nam Tai
Electronics, one of the world's leading manufacturers of electronic
calculators, is relocating most of its manufacturing operations of
printed circuit boards to Shenzhen (SCMP Aug 12, 1989). Elite wanted to
utilize and train technical graduates from colleges in China to cope
vith their plan of relocating higher technological products into China.
Tvo other examples of large firms deciding to increase their investment
in China are ASM Pacific and Integrated Display Technology (Holdings)
Ltd. One point worth noting is that most manufacturers will try to
select the Guangdong area to implement their relocation plan, and this
is in line with the desire of investors to invest in a more stable
environment. It is anticipated that even if China remains politically
conservative but is able to continue vith the "open door" policy and
improve the investment environment, manufacturers are still willing to
go there for investment.
In line with the strategy of maintaining the production in China,
the operation of electronics manufacturers in Hong Kong has to be
adjusted to suit. Only those operations that are not labour intensive
and require a high level of technology should be retained in Hong Kong.
Those manufacturers in the electronics industry generally feel that
whilst the majority of the production aiming at the lov end of the
market should be shifted into China, local manufacturing techniques
must go high-tech in order to compete with the other three dragons at
the high end of the market.
Problems or Difficulties Faced by Hong Kong
Garment Manufacturers
During the interviews, most respondents commented that in addition
to political risk vith respect to production in China, the biggest
threat to the garment and textile industry is undoubtedly the
protectionist pressure. The Textiles and Apparel Act of 1987, though
vetoed by the US President, sought to freeze US import at the 1986
level. Quota problem and export country-of-origin restrictions has also
limited the utilization of the cheap labor and land resources in China.
Garment manufacturers can only legally produce nonquota items in their
production base in China.
Strategies to be Pursued by Hono Kona
Garment Manufacturers
Being the most important export industries for Hong Kong for more
than two decades, garment industries has to face the quota problem on
top of all other problems faced by other industries. The industry
itself is quite mature with large factories having their investment
diversified long before the event of June 4 to areas like South America
54
countries where they could still enjoy preferential treatment without
quota restriction. Hence, garment manufacturers have a slightly
different set of strategies. They will continue to expand the
manufacturing base in China but with caution. As Mr. Kenneth Leung,
Excutive Director of the Textile Council of Hong Kong commented, other
industries can consider relocation easily, but the textiles industry
has quotas. If an overseas buyer insists on Hong Kong products for
exaraple, the exporter has no choice but to remain in Hong Kong. A
partial solution to the problem is to finish part of the production in
the nearby production base across the border. As revealed in our survey
result, most respondents said they would consider expanding their
existing facilities if it made economic sense but only in the southern
part of the country which was least affected during the political
unrest last year.
In line with expanding the production base in China, it is
necessary to diversify the market to nonquota restricted countries.
With the opening up of the Japan market and the economic development of
East European countries. Hong Kong market manufacturers will be
actively penetrating into these new market. On the other hand, the
operation in Hong Kong shall be improved for production of high
value-added fashion to serve the market with quota restrictions, i.e.
the US and the EC.
CHAPTER XV
CONCLUSIONS
Individually, the two major industries in Hong Kong under study
have different difficulties to overcome in order to remain competitive
in the face of increasing production cost and keen competition from
other countries. On the one hand, the garment industry is fairly
constrained by the quota problem and can only relocate part of its
production into mainland. For the production that has to remain in Hong
Kong, moving up market may be the only solution. On the other hand, the
major threat to the electronics industry is the mounting accusations of
dumping launched by the US and the EC. With the removal of the GSP
status, the competitiveness of the Hong Kong electronics industry at
the low end of the market is seriously affected. Moreover, due to the
lack of government support, the technological level of the industry is
lacking behind most of the competitors and Hong Kong can hardly compete
vith countries like Japan, Korea, Taiwan and Singapore at the high end
of the market in the long run if the existing situation is allowed to
persist.
The differences in strategies between the two industries in
overcoming these difficulties, as revealed in this study, have been
discussed at length in the previous sections. Yet apparently, both
industries do share some strategies in common which we can generalize
to get a feel of the strategies to be pursued by Hong Kong
manufacturers in the 1990s in general.
63
Hong Kong manufacturers are in a peculiar position. The natural
resources of Hong Kong is limited or in scarce supply. Hong Kong
manufacturers have to rely totally on imported raw materials and even
for labour supply, they have to depend on the huge labour force in
China for their survival. Yet due to historical reasons, Hong Kong will
be returned to China in 1997. So many Hong Kong manufacturers v i � 1 be
facing a dilemma. Personally, most top executives and management staff
of Hong Kong companies want to move out of Hong Kong and get a
citizenship in Canada, US or Australia in the same way as many other
Hong Kong people do in order to play safe. On the other hand, their
companies have to remain in Hong Kong as service and support centre to «
their production base in China. It is virtually impossible for them to
pull out since continuing with the production in China is almost the
only solution that is economically viable.
Hong Kong is groving closer and closer to China and shall soon
become one economic body. Although the political unrest in China has
put fear into Hong Kong's manufacturers and is forcing them to reviev
their strategies, prompting the industry to rush to automate their
production in Hong Kong and to give serious consideration to divest to
other South East Asian countries, it is expected that Hong Kong
manufacturers will continue to increase their commitments or at least
sustain the present investment in China. When the world economy begins
its upturn. Hong Kong manufacturers may inevitably be forced to invest
in China again in order to meet world demand. In summary, the
inseparable relationship between Hong Kong manufacturers and the
economic fundamentals on the mainland has not been undermined by the
China crisis and the strategy of relocating the production base into
China remains the most important strategy for Hong Kong Manufacturers.
For those who do not have confidence in China, they would have already
57
decided not to relocate to China in the first place and wouid be
suffering from keen competition from those who have relocated into
China. In the end, they will not be able to survive or they will have
to choose the cop-out strategy eventually and stay out of the business
in Hong Kong long before 1997. For the majority who either did not have
the ability to relocate elsewhere or decided to move forward under
calculated risk factors, some of the strategies that they will adopt
are:
1) Hong Kong manufacturers will continue to rely on China for
production of more basic items which are labour intensive to meet
the demand from the low end of the market. Hong Kong manufacturers
vill continue to maintain their close working relationship in the
southern part of China and will put Guandong area even higher up in
their priority list of choice for the relocation.
2) The majority of small to medium sized factories will inevitably
adopt a 'short payback policy with their investment in China. For
the minority number of large factories, individual companies may
have longer t e r � planning. With more abundant resources they can
afford to diversify, to penetrate local market, to move to trading,
retailing and marketing in order to broaden their sources of
revenue and hence reduce the risk. With a few exceptions who have
more confidence in investing in PRC, ve can safely conclude that in
general all factories are very cautious vith their investments in
China and a payback period of three years is a useful.guideline.
3) Generally, different strategies such as increasing material stock
level, vertical and horizontal integration etc. will be adopted by
Hong Kong manufacturers in trying to stay flexible and to create a
greater buffer in view of their heavy reliance on their production
in China.
58
4) Hong Kong will continue to complement the production base in China
vith modern management skills, industrial technology, bank
financing and communication network with the rest of the world. In
order to develop this complementary and cooperative relationship
vith China, Hong Kong should concentrate on training people with
commercial and industrial knowledge to cope with the demand from
the production base in China.
5) With relocation of the manufacturing base into China, Hong Kong
will gradually evolve from a manufacturing centre into a servicing
centre. Only those production processes that demand a high level of
skill should be retained in Hong Kong. In order to win in this
world of keen corapetition, manufacturers should not only aim at
moving up market and produce goods of better quality in order to
increase the added value of the products, but should also
concentrate on improving the design and development potential in
order to differentiate Hong Kong's products from the competitors'
to cope vith the ever changing and demanding market. According to a
survey conducted by Hong Kong Trade Development Council in 1989,
the major functions of Hong Kong manufacturers in future to
maintain the existing competitive position, in descending order of
importance, are:
- B u s i n e s s negotiation
- M a r k e t i n g
- D o c u m e n t a t i o n
- M e r c h a n d i s i n g
- P r o d u c t Design, R & D
- T r a n s p o r t a t i o n / warehousing
- Q u a l i t y control
- T r a d e financing
- D i s t r i b u t i o n
- Manufacturing
- Assembly / processing
6) In view of the return of Hong Kong to China in 1997, changing the
domicile of the holding company may be a possible strategy.
However, this can only be adopted by large companies which only
amount to a small percentage in terms of the total number of
manufacturers in Hong Kong.
Hong Kong manufacturers have in the past accumulated a wealth of
experience in management, marketing as veil as information gathering
and application. The competitive edge of Hong Kong's industry lies in
its flexibility and adaptability to rapid changes. The continued
upgrading and improvement of these capabilities in the 1990's will be
the major determining factor for success.
MJ
APPENDIX 1
GROUP STRUCTURE 一 THE GLORIOUS SUN GROUP
BOARD OP DIRECTORS 蓳 事
MANAGING BOARD " m m
製衣廢
� J I i
~ ~ ~ S a d i ^
��
I
——TRADING ‘ 海外貿晃 1
m m OFFICE m i
~ PfLAiED INDUSTRIES 輔脚亏業及其他j
APPENDIX 2
GROUP STRUCTURE - GOLD PEAK INDUSTRIES (HOLDING) LTD.
m::—::KrM11HH|i|y_HWIHB3IBIBBHBBfBBflffWHBBH
n nj i i jj i j}
“ -.. — 1 — - — . _ _ _ .
— j —- j — - _ _ J — _ . j
= § 、 : > : 、 . 丨 备 , J ' : : « 造 丨 萄 ™ 二 r j ^ T ^ ^ r :―-^ ^ : 眷 法 j 二漏 manufacturing 二 画 囊 隱 a c t u ^ g 魅 二
H 」 • ? 二 I L 份 • ? 巧 . . J i 子有 R公司 二 § 賈 8霣篥有 B公司 J m 柏 惠 * 子 有 e 公 司 一一…
m 她 Industries (Taiwan) Limited 趣 6P Bectronicj Umfted I ® Bowden Industries Umited GP Electronics (Huizhou) Umited :二 — H . • - 9 汽車音ffs品 i f l i^gsijgE件及子控制產品:^ 器及究子加工裝£
• Uyer-buittbanenes - H Car audio equipment - S Electrical and telephone accessories I H Tuners and electronic sub-assemblies H 台Sf — 香港 —M| and etectronic control devices —^H 中國 B Taiwan 100% — Hong Kong 100% - f l 香港 - • China 70% —— 2 « 一 - — Hong Kong 50% -fl
•霣JtJfg公司 一 邐基企業有«公.司 一 y y • ff荤精檫有B公司
Syfwlndajtrics Limited : Me Eotetprises Limited : Wica Electrical Pty. United Shinwa Industries (Oana) Lkmted —— - : “!?器裝置配件及有IS產品 i H 卡式機芯 • —
Micro-battenes&nxiafgeablebattenes _ Car aodo equipment _ Bectricai wiring accessories and l | | Cassette mechanisms , , - - — other specialized products I H 中國 IZII Hong Kong 100% 一 HongKoog 49.19% _ I H China 35%
= 金山電化工業(惠州)有H公均二 中霞罨子工.霣有R公ij ,二 3 6 - 4 % . 百 置 ( 惠 州 ) 霣 業 有 《 公 司 =
— CarA^ Bect^(ato) - 5 8 * 5 ( I 州)工業有 R 公司.fcoadway Industrial (Hubhoo) 一
^ -V- : ;C«paiiyUmit ‘ . - Ctpui Ctmu Limited • Company Limited ——
i S T ^ '' ^ 二 ; ^ 汽 , ® 産 岛 " 丨 = 贫 器 及 兑 話 £ 件 及 子 控 制 產 品 i H 五 金 及 件 —— 〜:汽' 一 Car aodw equipment ; . ‘ Bectricai and telephone accessories Metal and plastic parts
—— Ch«a ^ - : 85% _ : : : 另 中 : = and electronic control devices I ® 中國 — 一 AlcaineBatteriesUnrit«i 一 - r. '- ina ji 34.3% _ 中國 : ^ China 35% I Z I — — : • K柏(惠相}工業有 C 公 司 =
9-vottalkaJincbattenes - Xazhw Jtagaog Bectronlc Wujtncs — 奇 B S 管(裏州)有 R 公 g Umber (Huizhou) Utnited 香港 一 Cwnpaiy Limited — CSpsai Univoit Extmsioa 印刷電路板
^ m Z Z Hong Kong 50%— 汽車音S産S — (China) Limited - S Printed drcurt twards . ‘ 一 Caraixfio uipment : 3 棵费挨管及 K 件 : ® 中 國 • 一
^ ^ ^ ^ ^ ^ ^ — PVC conduits and accessories ^ H China . 15%
三 a i i B B B i _ j 银 " 运 兹 银 =
Biefies 金泊《子 *易有 R公司 - ― ^ ^ ^ ——
香港 i H GPEMarlceting Limited —— Canada 15.3% __ HongKoog 100% i B 汽革音 »及有 K産品
— • Car audb equipment and related products ABT^e有B 公柯 — • M w B
= = _ _ _ 二 二 : 中國》连之费池 H - —
一 及《 池原料 B � ^ ^ i f i E L ^ Batteries and battery materials B • ^ ^ S S m i T l i l S ^ o
(of ChinaoriQin) H 霄 器 及 附 件 及 贫 子 技 制 度 品 -香港 ^ • Electrical and tetephonc accessories.
u««« - Hi eJectrooic control devices Hong Kong 100% — … ||| •港
—__ Hong Kong 50% — — « ** _
- .-.... . . . . . — . 一 . - _ _ .. - - -
‘ — • * — _ . _ •. _ _ _
Percentages indicated are the Group's effective sharehokJings in the respective companies.
62
APPENDIX 3
QUESTIONNAIRE
_
t t : “ » ViU THE CHINESE UNIVERSITY OF HONG KONG 港 屮 文 大 IjX
SHATIN . NT . HONG KONG TEL.: — S s V ^ l ^ S ^ M二二 S I T Y • I F T ^ T T T ^ T T T FAX . (852) 0-6954234 m fn n n Hi ^ If,.零•六九 E 二
I:商tfPl丨,院硕士課 M B A Programmes 0-6952783
Faculty of Business Administration 3-7225808 (Town centre)
少生再题研究/丨丨实 Student Research Projects
Ooar Sir/Madam,
Re: Study on liusiness Strategies Pursued by Hong Kong Maim fact urers wi Lh PRC Investment in 1990‘s
As an expf)n(_ino、(i businessman PosiUonod to nu'ikc- del erminant, decision for y()uy co„,pauy. we would like to invito you to share with us vour experience on o「:mlH tnishn.ss s Unt ios. Wr are third year stu(i;.门 t.s in the ‘ part-time MBA ProKr-amme of the Chines. University of Hor. Kumr. lirul.r th'e l u't,广 of Profossor K.C. Mun, w(. arc rcscarchin, into the v. ews of local lo叫 Koi.jj manufacturers who hnve relocated manufacturing base in PRC 广w广cis continuinj. working relationship with China in the coming decade. Emphasi^ will be placed on the strategies that will be adopted to reduce " � : h political/economic risk. It. is hoped that the result of our study will shed some lifjht on the economic stance of Hong Kong.
All information obtained will be kept strictly CONFIDENTIAL and only the
l l T u ' '广 s u i t a,er processing will be released to interested parties ?h^ have participated in our research. So please indicate if you Jould lil^e to obtain the statistical s u g a r y report by filling in the column 二 1广 and we will .ail it to your attention. As such. L sincerely二pe
L^fr^^i^nr H ^.a^iaccurate as you could in responding to the questions
ratings and kindly return the questionaire to us with the stamped retur〗 envelope by f — e j ^ — u — E v e n if you do not have any investment in PRC, we appreciate you still return the questionaire by indicating below. ^
anrllsefu/"' 乂書 cooperation and assistance to make our survey possible
Sincere]y,
从 I ‘
“ 9 ^ � - / nirky i,r”",,( ii injr Kec
本木 I do nol l);ivf; nny i iivrsIuktiI in PRC. f']s note. . J am interest.'d in the s(.ot ist.iral i e{.ort of t he 'lufsl ionairo. PJs send mo one.
G3
m ‘ A 丨 1 THE CHINESE UNIVERSITY OF HONG KONG ;g 中 文 大 舉
SHAT IN NT HONG KONG T E L. : O 695211 1 . IelEX^^'IomT^UHk'mX . ft 弟 Pi 界 ⑴ . x T ^ Z T T T “ FAX • <85?丨 0.69〔、4?34 ,,r r 【n . .,;九 7£ 二 —. 一 -
M B A Programmes 0-6952783
Faculty o f Business Administration 3-7225808 (Town centre)
中'!• ?f ®研究用、 Student Research Projects
敬 啓 者 :
閒 下 作 為 資 深 的 公 司 商 解 決 浪 人 员 . 我 n 彬 望 能 分 享 閣 下 作 出 莱 務 決 馆 考
盧 的 究 ^ ^ 络 驗 。 我 們 是 中 大 三 年 制 兼 闭 士 S t程的學生。在閱建勒教授的
抱 導 下 , 我 們 擬 研 究 在 國 内 有 投 資 的 番 港 烧 家 對 中 港 經 濟 合 作 在 9 0 年 代 的
前景右法。硏究將好觅烧家如何制定馆略計 J !彳以分敢預計的政治 /經濟風
險。
所 有 資 料 将 绝 對 保 密 。 至 於 统 I t 结 果 則 含 發 給 台 協 助 给 予 資 料 的 有 期 人 士
。 閲 下 若 有 興 趣 播 得 上 述 结 果 • 訪 於 下 列 空 格 内 下 地 址 ’ 以 便 郵 寄 送 上
。 為 此 , 我 們 誠 窓 希 望 閲 下 能 撥 冗 協 助 讯 妥 附 上 的 冏 卷 ’ 並 以 附 上 的 回 郵
信 封 於 9 0 年 1 月 3 1 日 前 送 回 。 四 使 两 公 司 在 圃 内 没 有 投 資 , 仍 該 在 下 面
空 格 註 明 後 掷 回 。
對 閣 下 的 協 助 , 使 找 們 的 研 究 能 順 利 完 成 . 謹 致 深 切 谢 意 。
…蜂— 何小某 /
梁永基
- 我 司 在 國 内 沒 冇 投 资
- 本 人 祐 望 报 得 统 計 结 果 報 告 , 諸 按 下 列 地 址 寄 送 。
丨地址 (
香 潘 中 文 大 學 岡 肃 你 藏 贵
fM
注 息 : 項 目 - - 指 外 方 在 圃 内 以 各 種 方 式 包 括 三 來 一 補 、 合 作 合 • 、 進 行 的 投 * 。 口 T ^:、貫
Please circle only one nuiber c o r r e s p o n d i n g to the answer for each quest ion.
講 按 毎 條 問 題 ® — 甸 相 對 選 揮 答 案 的 號 碼 。
Part A Background Information 甲部 背景資料
Ql. The nature of business of your i nvestient in PRC is 資 公 司 在 國 内 的 投 資 項 目 屬 播 一 鹤 行 茱 ?
1. g a n e n t and textiles 訪继成衣 2. e l e c t r o n i c s 堪子 3. others (please specify : )
其他 ( 諸 説 明 : )
Q2. The total number of workers employed i n your factories in PRC is
貴 公 司 在 园 内 成 立 的 項 目 合 共 值 用 多 少 人 ?
1 . 50 or be low 5 0 ^ J^ T 2. 51 - 200 3. 201 - 500 4. 501 - 1000 5. above 1000 超 ig 1000
. The total nuiber of ventures set up by your company up to date in PRC is
資 公 司 直 至 目 前 為 止 在 画 内 共 投 資 了 多 少 智 項 目 ?
1. 1 only 2. 2 - 5 3. 5 - 1 0 4. 10 - 15 5. above 15 超 g l 5
Q4. The production capacity of all your factories i n PRC account for hov luch of your coipany ‘ s total production'?
5 年 、 司 在 圃 内 投 資 企 業 的 生 産 量 佔 賁 公 司 全 部 绝 生 産 量 的 百 分 率 為 多 少 ?
1. below 20X 30% 以 T 2. 20% to below 50X 20% M 50% JL^ T 3. 50X to below 70* 50X M 70% j^i T 4. 70* and above 70% 以上
Q5. For how lany years have you invested in P R C 贵 公 司 在 圃 内 開 始 投 資 至 今 已 多 少 年 ?
1. 1 ess than 1 year 少於一年 2. 1 - 2 years 二 至二年 3. 3 - 5 years 三至五年 4. 6 - 1 0 years 六至十 _ 5. over 10 years H jg -p ^
What is the p e r c e n t a g e of export to total sales of your p r o d u c t ion in PRC?
貴 公 司 在 H 内 企 案 的 産 品 出 口 佔 該 企 案 绝 销 産 量 的 百 分 率 為 多 少 ,
1 . below 30% 30% 以下 2. 30% to belov 50X 30% M50% 以下 3. 50* to below 70X 50X M 70% i^A T 4• 70X and above 70% 以 ±
0 7 . Do you plan to i n c r e a s e , reduce o「 keep the c u r r e n t level of investment in PRC? 賁 公 司 是 否 有 計 霞 彳 增 加 、 减 少 或 保 持 目 前 在 國 内 投 資 的 水 平 ?
1. increase 增加 2. reduce 减少 3* keep the c u r r e n t level 保 持 現 在 水 平
Vhat is the approx i aate p e r c e n t a g e of labour cost in the total product ion cost?
賁 公 司 生 産 所 箱 工 资 佔 生 産 绝 成 本 的 百 分 率 為 多 少 ?
1 • below 30X 30X J^ T 2. 20% to belov 50% 30* 至 50:^ 以下 3. 50!^ to belov 70X SOX M 70% jk T 4. 70X and above 70X 以上
Q 9 . Vhat will you c o n s i d e r the laxiiun a c c e p t a b l e payback period ^oi^ your coipany in e s t a b l i s h i n g a venture in PRC? 資 公 司 1 2 為 在 國 内 投 資 項 目 可 接 受 的 最 長 還 本 為 1 n多 y 7
1. less than 2 years 少 於 二 年 2. 2 - 3 years 二 至三杀 3. 4 - 5 years 四至五去 4. 6 - 7 years 六 至 七 ‘ 5. •ore than 7 years ^ ^^ ± ^
Q 1 0 . Vould you c o n s i d e r 1997 a critical dividing line in your b u s i n e s s p l a n n i n g ? 資 公 司 的 業 務 策 略 有 否 考 盧 1 9 9 7 年 作 為 一 分 界 结 ?
1. yes 有 2. no 否
Q 1 1 . In s t r a t e g i c b u s i n e s s p l a n n i n g , what is the nu.ber of years
二 ; 。 L f 化 敢 a ^ L h S f t - t e r ^ Planning for your c o i p a n y ? 在 制 訂 f e 期 業 務 策 輅 時 , 貴 公 司 一 般 界 定 為 多 少 年 ?
1. less than 1 year 少於一年 2. 1 year 一年 3. 2 years zi ^ 4. 3 years 三杀 5. others (please specify : )
其他 (請説明: )
0 1 2 . How about the nuiber of years you c o n s i d e r as 丨ong-ter_ p l a n n i n g for your c o m p a n y ?
在 制 訂 長 期 案 務 計 K 時 , 資 公 司 一 般 界 定 為 多 少 年 ?
1. 3 - 4 years 三至四年 2. 5 - 6 years 五 至 六 ‘ 3. 7 - 1 0 years t 至十年 4. o t h e r s (p lease specify : )
其他 (講說明: )
Part B C u r r e n t P r o b l e m s E n c o u n t e r e d by PRC Venturp<? 乙部 在 國 内 投 資 遇 到 的 困 難
Q 1 3 . Please indicate the r e l a t i v e iuportance of the prob l e . e n c o u n t e r e d by your PRC f a c t o r i e s before June last year
Most i m p o r t a n t , 1 二 least i m p o r t a n t ! please put a c i r c l e in the a p p r o p r i a t e p l a c e .
譜 國 S 考 企 業 在 去 年 六 月 前 一 般 遇 到 的 困 雞 。 如 為 非 常 重 要 , 該 ‘ 囿 , 5 , 如 認 為 不 璽 要 , 請 ‘ 團 , 1 。
least BOS t i ipor tant iiportant
不 重 要 非 常 重 要
1. M o t i v a t i o n of Hong Kong e x p a t r i a t e s 1 2 3 4 5 to work in PRC f a c t o r i e s
香 港 俊 員 對 回 國 内 工 作 的 興 趣
2 . s h o r t a g e of raw la ter i a 1s s u p p l y i p 7 ^ c 原 材 料 短 缺
3. lanageaen t prob I ei ] 9 7 a c: 管 理 問 題 i z J 4 b
4. p r e s s u r e froi foreign buyers to 1 2 3 4 5 shift product ion base
外 商 要 求 公 司 轉 移 生 産 基 地
5. excess ive b u r e a u c r a c y in PRC g o v e r n m e n t 1 2 3 4 5 in a p p r o v i n g a p p l i c a t i o n s
有 蘭 申 請 審 批 手 鑛 較 前 更 複 雜 霜 時
6. insufficient RMB working c a p i t a l 1 2 ? 4 ; 人 民 幣 流 動 資 金 不 足
7. technical incapability of w o r k e r s i 2 ? 4 R 國 内 工 人 技 術 水 平 不 足 4 3 4 : )
p a y i e n t s c r e d i t a b i1 i t y p e r i o d e x t e n d e d 1 2 3 4 5 to PRC buyers lengthened for local sales 圃 内 買 家 的 信 用 贷 款 期 蒋 延 長
s u p p o r t froi PRC partners / local 1 2 3 4 5 g o v e r n m e n t weakened 圃 内 合 作 移 伴 / 當 地 政 府 支 持 則 弱
f, /
10. t r a n s p o r t and d e l i v e r y i o o
* 物 付 運 拖 延 及 公 路 設 掩 不 足 〗 2 3 4 5
11. w o r k e r s need to go to p o l i t i c a l s t u d i e s 1 2 ? 4 c; and a f f e c t p r o d u c t i v i t y 【 j 4 5
工 人 箱 i t 行 政 治 . 擊 習 可 能 彭 皆 生 産 力
12. c o i i u n i c a t i o n s , ^ o . 通 訊 設 備 不 足 1 2 3 4 5
13. c u s t o m s , _ ^
海 W 手 讀 繁 理 1 2 3 4 5
14. labour supply s h o r t a g e i n -> . r 努 工 供 應 短 缺 1 2 3 4 5
15. e l e c t r i c i t y supply s h o r t a g e i o o . . 菜 力 供 應 不 足
1 6 . high u n e x p e c t e d / hidden cost (e.g. land 1 2 3 4 r 〒 f e e , e n v i r o n m e n t a l p r o t e c t i o n c h a r g e s . e l e c t r i c i t y d e b e n t u r e etc.)
• 5 2 S •,高(例如土地使用费’環境保護資’
17. o t h e r s (please specify : 、i o 。 , , ‘ i c 6 4 5
其他 ( 誇 説 明 : 丨 -
Q 1 4 . there .ight be s e e c h a n g e s in the
! 二 = 二 : ” 二 = 二 ” PRC f a c t o r i e s located
”!。了 二 ir r e l a t i v e ” 一 二 二 二 ? … “
J丨 : J e a s t i . P o r t a n t; please put a c i r c l e in the a p p r ; p r i a t e
望 i 新 5 巧 • 巧 資 盒 ! g S y 遛 『 當 - 〒 重 要 性 , ㈦ 認 為 非 常
least lost important important
不 重 要 非 常 重 要
】. aoti vation of Hong Kong e x p a t r i a t e s 】 2 3 4 to vork in PRC f a c t o r i e s J t 4 i) 香 港 傲 貝 對 回 國 内 工 作 的 與 趣
2• s h o r t a g e of raw l a t e r i a l s s u p p l y } 9 7 a c 原 材 料 短 缺 1 2 3 4 5
3. l a n a g e ^ e n t problem ^ o -2 A c 管 理 問 趙 i ^ S 4 b
p r e s s u r e froi foreign buyers to 1 2 3 4 5 shift production base 外 商 要 求 公 司 轉 移 生 産 基 地
5. excessive bureaucracy in PRC go vor n len t I 2 4 。 in approving a p p l i c a t i o n s ) 有 W 申 講 審 批 手 讀 較 前 史 後 雜 拥 時
6. insufficient RMB working capital \ 2 d ^ 人 民 幣 流 動 資 金 不 足
7. technical incapability of workers 】 2 ? 4 q 0 内 工 人 技 術 水 平 不 足 ‘ q 。
payments credilability period extended 1 2 3 4 5 to PRC buyers lengthened for local sales 圃 内 頁 家 的 信 用 贷 款 期 裔 延 長
9. support f roi PRC partners / 1 oca I 1 2 3 4 5 government weakened
國 内 合 作 移 伴 / 當 地 政 府 支 持 則 弱
1 0 . transport and del i very 1 p o 4 c 貨 物 付 運 拖 延 及 公 路 設 施 不 足 ^
11. workers need to go to political studies 1 2 3 4 5 and affect productivity
工 人 裔 進 行 政 治 學 習 可 能 影 雄 生 産 力
12. coiiun i ca t i ons 1 p ^ r 通 訊 設 備 不 足 ‘ z d 4 i)
13. custois 1 2 4 c: 海 簡 手 缠 繁 後 ^ ^
14. labour supply shortage 1 o q 4 c 努 工 供 應 短 缺 i z 4 b
- 15. e1ectr ic itV supply shortage ] 2 3 4 5 母刀 1 7 s S 小
16. high unexpected / hidden cost (e.g. land ] 2 3 4 5 use fee, environmental protection c h a r g e s , electricity debenture etc.) 其 他 S i S 費 用 高 ( 例 如 土 地 使 用 費 . 環 境 保 護 資 , 電力公僙等)
17. others (please specify : ) 1 2 3 4 5
其他 ( 講 說 明 : “ ‘ ‘ ]
What risks do you consider your PRC ventures will encounter under current political c 1 iiate and please indicate their relative likeliness to happen
? 公 S 气 S t ^ 投 資 的 項 目 會 遇 到 下 列 那 種 風 險 7 如 為 發 生 . 可 能 性 極 高 . 請 ‘ 圏 ’ 5 . 如 認 為 可 能 性 低 者 . 請 ‘ 團 , 1 。
Probability ® ^ 可 能 性
low high 低 蘇
I. I n r r e a s e t a r i f f s o n e x p o r t s 1 o 4 出 U 關 稅 增 加 I 、 1 >
f/’
2. Increase e x p o r t r e s t r i c t i o n s 1 9 . , , 出 口 限 制 增 加 ‘ ^ ^ ^ -
3. I n c r e a s e t a r i f f o n imports 1 9 , . ^ 入 口 W 稅 增 加 1 2 3 4 5
4. I ^ P o r t q u o t a s r e s t r i c t i o n s 1 9 , , . 入 口 限 額 I ^ 3 4 5
5. D i V i d e n d r e m i t t a n c e r e s t r i c t i o n s i o o . . 企 業 利 《 股 息 满 银 限 制 1 2 3 4 5
6. [a 义 a 丨 r e p a t r i a t i o n r e s t r i c t i o n s 1 ? ? 4 c; 满 银 投 資 * 本 限 制 1 2 3 4 5
S t r i c t e r price c o n t r o l s 1 o o , 广 價 格 控 制 1 2 3 4 5
8. Increased t a x a t i o n s 1 。 。 , r
稅 牧 項 目 及 百 分 率 增 加 1 2 3 4 5
Local c o n t e n t r e q u i r e m e n t s 包 含 酋 地 産 品 要 求 1 2 3 4 5
ICL Local s o u r c i n g r e q u i r e m e n t s
使 用 當 地 原 料 要 求 1 2 3 4 5
" a n ^ ^ a c t u r ing r e q u i r e m e n t 1 p o . . 規 定 産 品 必 須 在 當 地 生 産 1 Z 3 4 5
1 2 . F i n a n c i n g r e s t r i c t i o n 1 � � , r 融 資 限 制 1 2 3 4 5
13. fea⑵继 ion on i n v e s t m e n t 1 2 3 4 5
1 4 . 監 ⑶ = ^ 厂 i n v e s t . e n t 1 2 3 4 5
15. li.itation 1 2 3 4 5
J i : local p a r t i c i p a t i o n 1 2 3 4 S 當 地 股 本 要 求 參 與 的 ® 力 i Z 4 5
17. E x p r o p r i a t i o n 1 ^ o . -政 府 沒 牧 企 業 歸 國 有 】 2 3 4 。
18. C o n f i s c a t i o n 1 ^ o . 严 政 府 揪 用 企 業 資 産 1 2 3 4 D
19. O t h e r s (please specify : ) 1 2 3 4 5
其他 (!?^說明: ]
/丨。
Part C B u s i n e s s S t r a t e g i e s 內 部 窠托策tS
yil't 丄 e 厂 ur busi?『罕〒 s t r a t e g i e s in the short t e r . (ST) and in the long teri (LT), in r e s p e c t of your invest.^nt in PR「 to avoid the risks s t a t e d in Part B above'^ ‘
, 公 司 在 分 别 制 定 短 期 及 長 期 臬 務 策 略 方 針 時 是否有採取丨 r列不同
^ 5 有 . 1 1 ‘ 圈 ’ 1 。 並 講 注 意 長 期 及 鐘 岛 策 益 的 ® 別 : ^ . 如 " ^ 定
C e r t a i n l y C e r t a i n l y No Neutral Yes
t t定没有 玲定有
1. di ves t to other s o u t h e a s t j ST 短期 1 2 3 4 5 asian c o u n t r i e s
轉 移 至 其 他 東 南 亞 生 産 基 地 丨 L T 長 期 1 2 3 4 5
2. increase p o l i t i c a l risk 1 S T 短期 1 2 3 4 5 i nsurance cove广age
增 加 政 冶 風 險 的 投 保 丨 L T 長 期 ] 2 3 4 5
3. d i v e r s i f y the i n v e s t u e n t i n | ST 短期 1 2 3 4 5 PRC to other u n r e l a t e d
bus iness I LT 長朗 1 ? ? a c
分 教 國 内 投 資 至 其 他 不 同 行 業 丨 L i f e 期 1 2 3 4 5
4. increase the f l e x i b i l i t y of 丨 ST 短期 1 2 3 4 5 the f i n to c h a n g e
增 強 企 業 面 努 環 境 改 變 的 揮 性 丨 L T 長 期 】 2 3 4 5
5. integrate your b u s i n e s s 丨 ST 短期 1 2 3 4 5 . vertically to trading and
reta iling I LT -i- Ifl 1 ? ? a ^ 结 合 與 公 司 行 業 有 期 連 菜 務 作 丨 L i 長 期 1 2 3 4 5 垂直投資
6. product d i f f e r e n t i a t i o n to I ST 短期 1 2 3 4 5 avoid being e a s i l y s u b s t i -tuted by local c o u n t e r p a r t s | LT 長期 1 2 d R 将 産 品 多 樣 化 . 避 免 被 當 地 生 産 品 4 5 取代
7. •ove p r o d u c t i o n to higher 丨 ST 短期 1 2 3 4 5 techno logical s o p h i s t i c a t i o n
S S S 透 科 技 水 平 ’ 以 播 得 ! L T 長 期 I 2 3 4 二 e 地 政 府 支 持 ‘
8. increase the % of p r o d u c t i o n | ST 短期 1 2 3 4 5 for export coipar i ng to local
d o m e s t i c sales 丨乙丁 長期 ] 2 3 ^ S 增 加 産 品 出 口 . 避 免 依 钱 當 地 市 場 ^
9. increase the stake of PRC 丨 ST 短期 1 2 3 4 5 partner in your i n v e s t m e n t
要 求 國 内 合 作 彩 伴 增 加 股 本 丨 L T 長 期 1 2 3 4 5
10. reduce the aioun t of capital j ST 短期 1 2 3 4 5 i nvestient
减 低 資 本 投 資 金 額 I L T 長 期 〗 2 3 4 5
/ )
1 1 . s e c u r e r a v B a t e r i a l . s u p p l y ( S T te 8/1 1 2 、 ^ ^
b y f o r e x a i p l e i ^ p o r U n g 」
增 加 入 口 原 材 料 比 例 以 保 范 供 g ; 及 j L T 長 朋 】 2 3 4 [ 企 業 曲 續 運 作 议朋
1 2 . r e d u c e t h e d e p e n d e n c e o f I S T f e 朋 ] 2 3 4 ^
factories on local infra- “ str u c t u r a I s u p p o r t i L T g 斯 1 ? ? ^ c 值 量 减 低 對 笛 地 基 礎 設 拖 的 依 糾 ^ b ( 如 運 輪 、 屯 , 通 訊 等 設 備 )
13. reduce payback p e r i o d 丨 ST 短期 i o 4 ^
缩 短 投 資 回 本 期 I L T 長 期 1 2 3 4 5
14. o t h e r s (Please s p e c i f y : ) 丨 ST 短期 】 2 3 4 5
其 他 ( 請 說 明 - = = 二 二 丨 I L T 長 1 2 3 4 5
- The End -
( 完 )
T h a n k s for c o - o p e r a t i o n ‘ ‘
多 謝 合 作 I
BIBLIOGRAPHY
Books
Baglini, Norman A. Risk Management in International Corporations. New York: Risk Studies Foundation, Inc., 1976.
Jodice, David A. Trends in Political Risk Assessment : Prospects for the Future. International Political Risk Management: New Dimensions, 3-26, 1984.
Lax, Heward L. Political Risk in the International Oil and Gas
Industry. Boston, MA: International Human Resources Development Corporations, 1983.
Nehrt, Lee Charles. The Political Climate for Private Foreign Investment. New York: Praeger Publishers, 1970
Overholt, William H. Political Risk, London: Euromoney Publications, 1982
> ‘
0 ' Leary, Michael K. and William D. Coplin. Political Risk in Thirty
Five Countries, 1983 ed. London : Euromoney Publications Ltd,1983.
Poynter, Thomas A. Managing Political Risk: A Strategy for Defending the Subsidiary. International Political Risk Management: New Dimensions, 138-50, 1884.
Root, Franklin R. Analyzing Political Risks in Int'l Business, in A. Kapoor and Philip D. Grut, eds.’ The Multinational Enterprise in Transition, Princeton, NS: The Darwin Press Inc.; 354-65, 1972.
Brahm, Lawrence J. The Divestment Quandary. China Trade Report, September 1989.
Periodicals
Buckley, Adrican. Taking Account of Political Risk. Accountancy (UK) Vol. 100, 79-81. 1987.
7;j
HKTDC (1989) - Industry and Products Profile No. 3. 27.9.1989
Jones, Randal丄 J. Empirical Models of Political RiskR in llR m j ^ Production Operation in Venezuela. Journal of International— Business Studies 15 (Spring-Summer), 81-95, 1984.
Kobrin, Stephen J, When Does Political Instability Result in Increase Investment Risk, Columbia Journal of World Business, 13<Fall), 113-22 (1982), Managing Political Risk Management, Berkley, CA University of California Press
Wclean, A.A. The Guangdong Connection. Hong Kong Business, July 1988 •
Robot, Stefan H. Political Risk: Identification and A^.c^^^^monf
Columbia Journal of World Business, 6 (July-Aug. ), 6 - 2 0 , 1 9 7 1 .
Schin’dt, David A. Analyzing Political Risk. Business Horizons, (July-August), 1986.
Shapiro, Alan C. Manaaino Political Risk: A Policy Appr^n.nV.
Columbia Journal of World Business, 1 7 ( F a l l、 62-71, 1981.
S.C.M.P. South China Morning Post. June 7, 1989秦
S.C.M.P. South China Morning Post. Aug 12, 1989.
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